Market Trends

Overpricing. It happens all the time in real estate – especially in today’s market. I get where sellers are coming from because we’ve had so much glowing real estate news for more than five years. But that doesn’t mean we’re in a market where you can command whatever price you want.

Chasing the unicorn: Many sellers are pricing their properties too high. It’s as if they expect record-breaking prices and multiple offers every time because of how “hot” the market is. Homeowners get so fixated on the idea of a fiery market that they price for that one unicorn buyer who’s going to mysteriously pay more than anyone else. This “unicorn” will ignore all recent sales and listings and magically offer 10% higher than anything. In Sacramento the idea is a Bay Area “unicorn” will swoop in with fat stacks of cash and totally ignore similar comps that are selling for less. It’s nice when sellers get lucky like that, but in today’s market buyers are actually much more finicky about price. Despite a legitimate housing shortage we don’t have a market where buyers are willing to pay crazy prices that are totally disconnected from reality. In other words, we don’t have a market where pricing for the “unicorn” makes good sense (unless you want to sit on the market instead of sell). Take a look at the image below that shows price reductions over the past 24 hours in the Sacramento region. These 78 properties have been priced too high for the market.

My advice? Price for the real market instead of the unicorn. Give the most weight to similar sales and similar listings that are actually getting into contract.

Aspirational pricing: If you aren’t familiar with the term aspirational pricing, Jonathan Miller coined this phrase. It’s a great way to describe the phenomenon of sellers fixating on prices that are simply disconnected from the real market.

10 reasons why sellers overprice:

1) Hot headlines are imposed on the price instead of looking at comps.

The market went to sleep for the holidays and it’s just starting to wake up. Let’s talk about that along with pulling stats like a boss. Then I have a huge market update and review for those interested.

No sales to support higher values: In a normal January the market is in a weird spot. It’s coming out of hibernation from the holidays, and even though buyers eventually start offering higher prices, the most recent sales might not support higher contracts. In other words, sales from November and December might actually be much lower than what buyers are willing to pay in later January and February because the market has begun to awaken out of a lull. The reality is we might not see any upward value movement in sales stats until March, but the upward trend will begin to happen in January and February before we see it in the stats. Data lags the trend. I remind myself of this every year.

Getting practical: In coming time as the market presumably heats up I recommend looking for a pattern of pending sales (probably higher), watching for properties spending less time on the market, and study what prices normally do this time of year in your area. In many locations prices tend to pick up where they left off in the late summer before they faded during the fall.

Game-changing stats: Paying attention to numbers has literally changed my career, so I wanted to give some tips for how to begin pulling stats for a city, county, neighborhood… Here’s a chart you can use to track price changes and a few other key elements (DOWNLOAD here). I highly recommend carving out a few minutes each month to track some of these basics. Then of course find relevant ways to share the numbers with your clients and contacts.

Here’s a video where I talk through how to use the chart as well as mistakes to avoid. It’s about 10 minutes. Click below (or here) and watch in FULL screen:

–——-——- Big monthly market update (it’s long on purpose) ———–——-

Prices have been softening in Sacramento, but it hasn’t been painfully dull like some fall seasons. Overall prices in the region sloughed last month (not a surprise), it took six days longer to sell, and the year closed out with price metrics being about 8-10% higher than December 2016. The number of listings really took a nosedive last month, but that’s what happens since people don’t list in November and December unless they really have to sell. Listings should increase over the next couple months as the market heats up for the spring. I know hungry buyers feel like inventory won’t be coming, but it’ll happen.

Quick insight: Housing inventory is sparse, but one good thing is inventory seems like it went a little more sideways last year instead of declining sharply. On a positive note, the market ended with the lowest number of foreclosures and short sales in the past decade. This isn’t a shocker, but it’s still a sign of healing after the “bubble” burst more than ten years ago. Prices in 2017 increased about the same as they did the past couple years. Lastly, sales volume has been steady for a few years, and that shows the market has found a rhythm.

What’s the real estate market going to do in 2018? Let’s talk about some of the big conversation pieces emerging in Sacramento and beyond. Any thoughts? What are you watching? I’d love to hear your take.

1) Affordability: This year we’re going to have more conversations on affordability – or lack thereof. This is a big issue that’s not only covered extensively by the media, but it’s something being felt by real people – both prospective buyers and renters. According to NAR’s Housing Affordability Index, affordability has been declining.

2) More Color: Lots of design magazines and articles are talking about seeing more color in the kitchen and other parts of the house. Some say totally white kitchens are on the way out. Others anticipate seeing more avocado green on walls (hello 1970s). And brass fixtures are back in style too (hello 1980s).

3) Marijuana: This is a big year for California because recreational or “adult use” marijuana is now fully legal. Whether you are personally for or against this, it’s something we need to watch because of the potential economic and real estate impact. I’m not writing as an advocate, but I am saying let’s pay attention to commercial rents, vacancy rates, job opportunities, cash purchases, changing zoning code, land value, advertising, public perception, etc… So far the City of Sacramento has been a lone wolf in allowing commercial cannabis cultivation since surrounding cities have basically said NO thus far. In 2018 I suspect we’ll see other cities also jump on the cannabis wagon.

4) Smart homes: We are seeing incredible advances in technology for homes. It’s not just the “Echo” or “Google Home” either, but “smart” products are showing up for thermostats, shades, color-changing light bulbs, appliances, door locks, security systems, etc… The market doesn’t fully expect these features yet in every home, but there may come a day when they are normative. I actually bought a Google Home for my office last week. Did anyone else?

5) Creative financing: There is still upward pressure on values in many prices ranges and locations in light of a housing shortage, but if interest rates rise too much it could soften values (duh). This is where lenders can artificially keep prices high by offering more creative loan products to help buyers “afford” the market. Sounds healthy, right? Keep in mind we are nowhere near 2005 when money was being given to anyone with a pulse, but if lenders loosen things up too much it’s probably a good thing to be concerned.

6) Appraisal waivers: About a year ago Fannie Mae rolled out an appraisal waiver program that would not require an appraisal on certain transactions. Fast forward to today. The narrative right now from quite a few voices in the real estate community is that we need to use more alternative valuation products (without a human appraiser) for the sake of quicker turn-times, a lower cost for consumers, and a more efficient mortgage process. I know, I sound like an angry human since robots are taking over the world, but there is a deeper issue here. Messing with a system of checks and balances can be dangerous for the market. Do me a favor and re-watch The Big Short and ask yourself if there is any reason to be concerned about loosening things up when it comes to real estate valuations. I may write more on this soon.

7) Rent control: Rents have risen dramatically in many parts of the country over the past few years, so let’s expect to see attempts this year to enact rent control. Remember, what rent control does is limit how much a landlord can increase rent by putting a price ceiling on rent. There are both staunch proponents and critics of rent control, so be ready for some heated conversation if you bring this topic up online. As an FYI, in Sacramento we’ve had near 10% rent increases for three years in a row without much wage growth.

8) Republican Tax Plan: Some say the new tax plan will create less incentive for home ownership and cut values drastically whereas others say there won’t be much impact in most of the country beyond some higher-dollar pockets. The truth is the future hasn’t happened yet, so in humility we must admit we don’t yet know the extent of any impact. This is why I like what Jonathan Miller wrote, “If there is one thing the housing market doesn’t like, it is uncertainty. As it relates to housing, this new law is an “uncertainty casserole” and homebuyers and sellers will take a while, probably 1-2 years to adapt to the new world order and sales will be tempered until there is equilibrium. Prices in high-cost housing markets will clearly slip, although I don’t anticipate a severity.”

9) Disappearance of the $150,000 market: Last year I put on my prophet hat and talked about the disappearance of the $100,000 market in Sacramento. It was a safe bet to make that prediction because there is so much upward pressure at the lowest prices. This year I think we’re poised to see few homes under $150,000 by the end of the year. Remember, it’s not just the lowest prices in the market that are experiencing upward price pressure. It’s really entry-level homes in most neighborhoods – regardless of the price. Yet the median price in Sacramento has been hovering around $350,000, which literally means half the market is shopping below that price point. This alone reminds us it can be much more competitive at lower price ranges since more buyers are shopping there.

10) Alternative housing: As values have risen for single family detached homes, buyers at the lowest prices may need to consider other options such as mobile homes, tiny homes, storage container units, and lower-priced condos. Some alternative housing can feel sexy because of the lower cost and the cool vibe, but let’s remember the most expensive thing in real estate is often the land and permits. Thus it’s not always easy to build that low-cost alternative structure.

11) Increase of real estate agents: When prices are hot everyone and their Mom gets into real estate, so let’s expect to see more new agents out there. I’ve talked to a number of former loan officers wanting to get back into action too (I wonder if they know how much the game has changed since 2005). I’ve also talked with a number of agents wanting to become appraisers.

12) Housing shortage: We’ve not had much new construction over the past decade, and we’re feeling it because there aren’t enough units to satisfy demand. The good news is builders seem to be busy at work, which will help add more units in 2018. But the bad news is it takes time to build, so sprinkling in some homes and apartments here and there is not a quick way to solve a housing shortage. Moreover, one of the struggles in Sacramento is many skilled laborers left the area when the previous real estate bubble burst, so having enough workers is an issue. If anything the housing shortage seems poised to persist, though it seems like there is some relief on the way too. Also, last year housing inventory was actually slightly higher during some months compared to the previous year (though still anemic).

13) Bubble conversations: With values creeping back to their previous peak (or beyond) in some neighborhoods, it’s only natural to have conversations about “bubbles”. If you don’t believe me, show this graph to 10 people and tell me how many mention the word “bubble”. See my open letter to buyers worried about a housing bubble because this is a loaded conversation. On a side note, one thing to keep in mind is some owners who sense the top of the market is near may choose to list this year, and that can create some inventory. Just today I spoke with someone who is planning to leave California (and probably move to Idaho or Texas). This guy’s idea is that he’ll list his home in a few months in order to cash out while values are high. Does this man represent all sellers? No. But does he represent some? Yes.

I hope that was helpful or interesting.

Questions: What else do you think will be important in 2018? Did I miss something? I’d love to hear your take.

I started this blog almost nine years ago, and this is my last post for the year. After next week I’ll be lying low, enjoying family, doing some woodworking, staying on my diet (I’m down 30 pounds), and taking some time to get recharged. But first I have two things on my mind.

Thank you: Thank you so much for hanging with me for another year. I cannot tell you how much I appreciate your support, friendship, comments, emails, insight, and the business you send my way. It might sound cheesy, but I get so much joy out of writing once a week and I’m grateful for you. It’s been a dynamic year for business too, and I honestly could not be doing this without your support. Here’s to continuing to grow together. Please don’t stop asking questions, pitching in thoughts, and challenging my thinking.

Big market stats: Secondly, if you’re looking for the latest market trends for Sacramento, you’ve come to the right place. Check it out below.

From my family to yours, Merry Christmas and Happy Holidays.

–——-——- Big monthly market update (it’s long on purpose) ———–——-

The market is often dull during the fall, but that’s not the case this year. I mean, we’re definitely seeing slightly lower prices, it’s taking longer to sell, and sales volume is sloughing, so clearly the signs of a slower market are here. Yet this fall season isn’t really incredibly slow or painfully dull either.

Sideways: Price metrics were more or less sideways last month, though some metrics either showed a slight uptick or a slight decline. Overall there wasn’t much change from the month before in terms of price, but it took an average of three days longer to sell. This November saw almost the same amount of sales as last November for the region. Housing inventory is slightly higher than the same time last year, but it’s still hovering at 1.60 months for the region – which is still low. In other words, the housing shortage didn’t go anywhere.

Bitcoin & Modest Appreciation: The rapid increase of Bitcoin has been the talk of town lately, and it’s also seemed to fuel some conversations about quickly rising values in real estate. I get the comparison, but we’re really not seeing Bitcoin type huge increases in real estate. In fact, this year in Sacramento values have seemed more modest in many price ranges, which means somewhere around 5-7% upticks. I realize “modest” in California would be huge in other areas of the country, but that’s not really the case on the west coast. Yet the bottom of the price market easily saw 10-15% increases in many areas of Sacramento. That’s not so modest.

Our “Bitcoin” real estate market in 2012 & 2013: The closest to rapid appreciation we’ve seen in Sacramento in recent years took place between 2012 and 2013 in which we saw price metrics change by 35-40% over the course of one year. During that time both real estate agents and appraisers said it wasn’t easy to keep up with how quickly prices were changing.

$7M Sale: Did you see the sale in Granite Bay that closed two days ago at $6.95M? What the? This is one of the highest residential sales ever in the Sacramento area. You can watch a video tour of it here. Also, that $4.1M condo listing Downtown has been pending since November. I don’t know what it’s in contract for yet, but let’s talk about it when it closes.

Rents: Sacramento made a list again on the fastest growing rents. Yardi Matrix reports a 9.1% uptick in rent year over year in November. Now if we can only get wages to grow by 9.1% too.

Price Sensitive: Lastly, the market may not be incredibly dull like it is during some fall seasons, but it’s still price sensitive. This means buyers are tending to be logical, well-informed, and often not so desperate as to offer any amount. My advice? Don’t just look to the high sales from the spring and summer. What is getting into contract right now? That will give you a good picture of the current market and a hint for how to price too (possibly lower than the height of spring / summer).

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